While most of us never trade commodities, raw material prices often provide a window into the health and wellbeing of the global economy. There are three commodities that I like to follow for reading on economic conditions around the world. These raw materials tend to experience price increases as the economy grows and declines during periods of economic contraction.
The three commodities markets including crude oil, copper, and lumber are like a three-legged stool when it comes to a reflection of global economic conditions. Energy consumption rises when the global economy is booming. Copper is a building block for infrastructure around the globe and provides clues about conditions in the world’s most populous nation, China. The Chinese are the leading consumers of the red metal. Lumber is a construction essential and often reflects the health of the real estate market in the US. Together the three commodities often provide guidance that translates into gains or losses in the stock market.
Over the past week, the three commodities have been sending positive signals for the economy. After trading to a low at $42.36 on Christmas Eve, crude oil rebounded to $55.75 per barrel and settled at $53.66 on Tuesday, February 5, over $11 or almost 27 percent higher than its late December low. The price of copper rose to a new high for 2019 at $2.8245 on February 5. Copper moved higher from a low at $2.5430 on January 3, a rebound of over 11 percent and was just under the $2.82 level at the close of business on Tuesday.
Meanwhile, the most dramatic move may have come from the lumber market. Last October, the price found a bottom at $299.90 per 1,000 board feet, on February 5 the price settled at $438.90, over 46 percent above its low. Oil, copper, and lumber are telling us that the state of the economy is healthy.
As the weekly chart highlights, the E-Mini S&P 500 moved from a low at 2316.75 in late December to a high at 2737 on February 5 and the stock index recovered by over 18% since late last year.
The recent price action in the oil, copper, and lumber markets is supportive of gains in the stock market. Tax and regulatory reforms continue to support strong profits this earnings season, but the signal from the commodities that serve as a barometer for growth is flashing a green light when it comes to a continuation of the rally that has taken stocks higher in six of the past seven weeks. A deal on trade between the US and China could serve to turbocharge the current trend in the stock market given the current bullish environment.
Commodities are global assets, and the path of their prices tells us a lot about demand and the state of the economy. As of the beginning of February 2019, the raw materials are giving a thumbs up for the global economy.
These commodities send signals to the stock market which had a rough time during the final three months of 2018. Since then, stocks have taken off to the upside erasing more than half of the losses from the September peak to the Christmas Eve low.